Sellers hammered
gold again this week on news from the Fed. The minutes from its
latest FOMC meeting convinced traders the odds for a third round of
quantitative easing are waning. This was the latest in a long line
of QE3 scares that have become the bane of gold’s existence. But
they are merely a distraction from the Fed’s ongoing massive
monetary inflation behind the scenes, which is very bullish for
gold.

Gold has suffered
much from QE3 scares. This week’s FOMC minutes drove it 3.4% lower
in 2 trading days. On the last day of February, gold plummeted 5.1%
after the Fed Chairman’s testimony to Congress made QE3 look less
likely. Gold hadn’t seen such a huge down day since December 2008
during the epic stock panic! Surrounding an FOMC meeting in
mid-December 2011, gold plunged 8.0% in 3 days.

This sad litany
drones on, all the way back to before QE2 ended in June 2011. Most
of the big gold selloffs in the past year have been driven by
comments out of the Fed implying lower probabilities for any QE3
campaign. As vexing as this phenomenon has proven for long-side
gold traders, the Fed isn’t to blame. It has been clear all
along that QE3 wasn’t likely unless the US economy faltered
dramatically.

I suspect the
primary reason the Fed has been hesitant to launch QE3 was the
firestorm of criticism surrounding the formal birth of QE2 in early
November 2010. Immediately upon its announcement, governments and
central banks around the world loudly condemned the Fed in a very
public way. This was amazing, as usually any criticism is behind
closed doors. I’ve never seen anything like it.

Even more
problematic for the Fed was the anger the QE2 inflation ignited in
Republican Senators and Representatives. The Fed serves at the
pleasure of the US Congress, which has the full authority to do
anything from cutting back its power to outright abolishing it. And
like all other political entities, above all the Fed wants to
survive. So heavily stung by QE2 outrage, QE3 was never really
viable politically.

There is no doubt
a QE3 would be very bullish for gold, as QE1 and QE2 were.
Quantitative
easing is the pleasant-sounding euphemism given to the
disastrous practice of debt monetization. In QE the Fed buys
US Treasuries, effectively “financing” Obama’s record overspending
and profligacy. The catch is the Fed creates the money used to
purchase bonds out of thin air. QE is pure, unadulterated
monetary inflation!

Gold has always
thrived on fiat-currency inflation, for simple supply-and-demand
reasons. Relatively more paper dollars are available to chase
relatively less gold. While the dollar supply expands at
double-digit annual rates, the global above-ground gold supply
continues to gradually grow near its historical average of just 1% a
year. So it takes more dollars to command an ounce of gold, bidding
up its dollar price.

The problem over
the past year is the QE3 hype has grown so deafening that
traders wrongly assume it is the Fed’s only form of monetary
inflation. Therefore, they reason, if there is no QE3 then there is
no inflation so we should sell gold. But nothing could be farther
from the truth! As the Fed’s own money-supply data shows, our
profligate central bank continues to merrily inflate away like
there’s no tomorrow.

This first chart
looks at year-over-year growth in the broad MZM money supply,
superimposed over gold. The raw MZM data is weekly, while gold’s is
daily. These charts run back to 2006 for a couple reasons.
February 2006 is when Ben Bernanke took the helm of the Fed, so this
span encompasses his whole reign. It also provides a pre-panic
baseline and shows the stock panic’s impact on monetary inflation.

Before George Bush
the Younger appointed Ben Bernanke to be Fed Chairman, he had the
nickname “Helicopter Ben”. This came from a 2002 speech where he
said a central bank can always avoid deflation by simply printing
more money (“helicopter dropping” it). In looking at the record of
broad money-supply growth over his tenure, Bernanke has certainly
lived up to this reputation. This guy is a monster inflationist on
par with history’s most notorious.

To get some sense
of a baseline, around the world broad fiat-paper money supplies
generally grow around 7% a year. With global mining only adding
about 1% to the gold supply annually, you can see why gold generally
tends to grow more valuable in paper-currency terms over time.
Bernanke came into office after
years of
declining MZM growth had finally reined it back to very
respectable sub-3% levels.

But the problem
with central banks is there is only one thing they can do,
inflate. When your only tool is creating paper money out of
thin air, it looks like the solution for everything. A recession
coming? Inflate. A stock panic spawning extreme fear? Inflate.
Teenage pregnancies up? Inflate. Aliens invading Earth? Inflate.
So when the subprime-mortgage crisis hit in 2007, Bernanke dutifully
fired up his printing presses.

Within just over a
year, the combination of the subprime crisis, a general credit
crunch, and a global stock selloff had driven the Fed to more
than triple its broad monetary inflation rate to an astounding
17%! Bernanke’s crazy inflation naturally drove a massive rally in
gold, catapulting it from $570 the day he took office to $1005 in
March 2008 (when MZM growth peaked). This 77% gain in 25 months was
driven by old-fashioned monetary expansion, the term “quantitative
easing” hadn’t even entered the popular lexicon yet.

Remember that the
blue line above is not the actual MZM (which looks parabolic), it is
absolute annual growth in this measure of the US dollar
supply. So Bernanke and his fellow inflationists didn’t even
attempt to remove some of their legions of new dollars from
circulation. Instead the Fed kept right on growing MZM at a rate
better than 10%. A healthy new
cyclical stock
bear in early 2008 concerned the Fed, so it predictably
inflated.

Then the first
true stock panic
in 101 years erupted, a legendary fear superstorm unlike
anything else we’ll see in our lifetimes. It was in this terrifying
time, November 2008, that the Fed started an unprecedented (in the
US, but not in banana republics) bond-monetization program that
would later be known as quantitative easing. Later in March 2009,
the Fed greatly expanded QE1. If you want to learn about
these campaigns in depth, I wrote
another essay
on them earlier.

Naturally gold
rallied as the Fed created a staggering $1750b out of thin air to
buy up mortgage-backed bonds and US Treasuries. Nothing like this
had ever happened before in the century-long history of this central
bank, it was radically unprecedented. But note that for most of
QE1, the MZM growth rate was still high. Though it did fall briefly
below 0% to actual contraction in mid-2010, this shrinkage didn’t
last long.

In that odd MZM
trough, the Fed’s second monetization campaign that would become
known as QE2 was born. After starting it in August 2010, the Fed
brought it to its full $900b strength a few months later in
November. As QE2 unfolded, gold enjoyed an enormous rally.
Around the world, traders began confusing the separate additional
inflation of quantitative easing with the core underlying monetary
inflation.

And the latter
grew and grew. By the time QE2 formally wrapped up at the end of
June 2011, MZM growth was back up near 8%. Since then, it has
averaged 9.2% with plenty of spikes above 10%. The last time
broad-money-supply inflation was this high in the pre-QE days in
late 2007, gold soared. Bernanke’s Fed has once again pegged
its dollar-expansion up near the 2007 and 2008 crisis levels!

In addition,
consider gold since the end of QE2. Today thanks to those periodic
QE3-scare selloffs, everyone is convinced that no QE3 will be
devastating for this metal. But history argues otherwise. Since
QE2 ended, gold has consolidated near all-time record highs.
The average gold price over the 9 months since is an incredible
$1694! As recently as 2010, this would have seemed impossibly
optimistic.

If the lack of QE3
was a big fundamental problem for gold, it should have sold off
sharply when QE2 ended. Gold closed at $1501 that day. But instead
this metal rocketed 26% higher in the next 7 weeks in a rare
summer rally on
growing fears of Obama’s mind-boggling profligacy forcing the
first-ever debt downgrade or maybe even default in our nation’s
history. Gold has done just fine in the post-QE era.

If gold hasn’t
fallen without more quantitative easing, if it has been able to
consolidate near all-time record highs without giving back much at
all, then why does QE3 matter? With MZM growth approaching 10%
annually for the better part of a year now, Bernanke and his merry
band of inflationists are happily providing torrents of new fiat
dollars without QE. Why are traders so myopically fixated on
QE3?

This is the real
problem for gold, and it is purely psychological. Since the end of
QE2, there have been 8 FOMC meetings. And 2 of these were
unscheduled, what I consider “emergency” meetings. In how many of
these meetings did the Fed launch QE3, or even imply a QE3 campaign
was imminent? Zero. After this perfect post-QE2 track
record of no QE3, why on earth are traders still eagerly expecting
one? After the second FOMC meeting or so, no QE3 was no longer
news. Yet silly traders still treat it as such.

The Fed’s monetary
inflation has been dramatic, up at crisis levels, in this post-QE
world. With the annual supply of newly-created US dollars growing
at 10x the rate the world’s gold supply is expanding, there
is more than enough inflation to continue pushing
gold’s secular
bull higher. Quantitative easing is mere misdirection, smoke
and mirrors hiding the fact that true monetary inflation remains
explosive.

This next chart is
similar, but looks at the narrowest measure of money. M0 (it’s a
zero) is also known as the monetary base. It is simply currency
(paper dollars and coins) in circulation, currency in bank vaults,
and reserves commercial banks have on deposit with the Fed. It is
critical because it is the base of all money we use in daily
transactions. It is also the base from which fractional-reserve
banking multiplies.

Thus M0 has the
most direct impact on inflation of all. Before Ben Bernanke came
along, American central bankers were rightfully so scared of ramping
this that its
48-year pre-panic average of annual growth ran at just 6.0%.
But Bernanke, who history will remember as a crazy radical
inflationist, decided to ramp the monetary base like nothing no one
had ever imagined. And he is still doing it today!

Once again the
blue line is absolute annual M0 growth, the actual monetary
base itself looks parabolic. Also note the vastly expanded right
axis, which is 6x as large as the earlier MZM chart! Right during
the stock panic, the Fed started expanding M0 at an unprecedented
rate. In October 2008, its year-over-year growth soared from just
under 10% to nearly 37%. And QE1 rapidly accelerated this record
inflation vertically from there.

This monetary-base
ramp continued to explode as QE1 was expanded, ultimately peaking
near staggering 113% annual growth in mid-2009! And though
this growth rate finally slowed dramatically in late 2009 and 2010,
it only went below zero for a couple months late that year. This
means that all the torrents of new money Bernanke’s Fed injected
into the system are still there. That inflation never left.

Now you’d think
that with the end of quantitative easing the M0 growth profile must
be back to normal, right? Not a chance under this crazy Fed. Since
the end of QE2 last June, annual M0 growth has still averaged a
breathtaking 33%. So on top of all the Fed’s massive panic
inflation, it is continuing to grow the monetary base by over 5x its
half-century pre-panic average in this post-QE era! Wow.

In both broad and
narrow money-supply terms, nearly every fiat-paper dollar Bernanke’s
Fed has ever created is still out there. And on top of that
the Federal Reserve is still growing broad money almost 10% a
year and narrow money over 30%! As I watch this new money-supply
data come in every month, you can imagine my incredulity at today’s
ridiculous notion that no QE3 somehow means no more inflation.

And consider the
gargantuan money supplies from which this current growth is
derived. The day Bernanke took office, M0 and MZM ran $804b and
$6805b. 6 years later at the end of February 2012, they were up to
$2695b and $10,777b. So 30% and 10% growth rates now mean a heck of
a lot more money being created than similar rates back then! The
sheer quantity of monetary inflation is staggering.

While the Fed’s
giant pair of quantitative-easing campaigns was pure inflation that
was great for gold, QE was never the whole inflation story. Before,
during, and now after QE, the Fed has been aggressively growing the
core underlying money supplies. And the money supplies are truly
the most fundamental measure of real inflation. With it still
running at crisis growth rates, gold has nothing at all to fear.

Almost without
exception, all of gold’s post-QE2 QE3-scare selloffs have erupted
in the futures markets. Most of the time the
GLD gold ETF
doesn’t show significant differential selling pressure, which means
the stock investors who own gold through this vehicle aren’t
freaking out. The goofy futures traders have got to get it through
their thick skulls sooner or later that no QE3 is no longer news, it
is nothing new.

At some point I
suspect is coming soon, this whole QE3 mania is going to quickly
fade. Before QE1 was even a twinkle in Bernanke’s eye, gold had
already quadrupled in its secular bull. But during the whole
QE1 and QE2 era, gold merely gained another 50% or so. The great
majority of gold’s bull happened without quantitative easing,
and gold has continued higher even after the Fed quit monetizing new
Treasuries.

While the lack of
a QE3 is being used as an excuse for hot money to slosh out of gold
periodically, it is certainly no fundamental justification.
Paper-money supplies all over the world continue to explode, growing
dramatically. This is naturally very bullish for gold since its own
supply growth is so physically limited. Even the retarded futures
traders are going to manage to figure this truth out sooner or
later.

The gold QE3
scares we have weathered over the past year or so are a sideshow,
misdirection from the serious real inflation happening in US
money supplies. As long as the Ms continue surging at high rates
relative to history, the monetary environment for gold remains
super-bullish. And given this Fed’s track record of doing nothing
but inflating radically, I can’t see this behavior changing anytime
soon.

Provocatively gold
is not even the biggest casualty of the QE3 scares. That dubious
honor goes to the gold stocks. Whenever gold is driven lower on the
latest “revelation” that QE3 isn’t coming, gold stocks just get
crushed. They have been hammered down to such insanely-oversold
prices that they are now trading
at panic levels
relative to the gold price that drives their profits! Today the
flagship HUI gold-stock index is trading as if gold was at $900, not
$1600. This anomaly is ridiculous and unsustainable.

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The bottom line is
quantitative easing is certainly not the only form of monetary
inflation. Throughout and after its widely-followed QE campaigns,
the Fed has continued to grow both narrow and broad US dollar
supplies at very high rates. The magnitude of this core inflation
is even more amazing considering the gargantuan bases it is coming
from. Such incredible monetary inflation remains very bullish for
gold.

So while the QE
inflation was undoubtedly great for gold, the lack of QE3 doesn’t
mean the Fed has mended its inflationist ways. The QE3 scares that
have pummeled gold are merely psychological, not fundamental.
Whether QE3 happens or not, gold prices will eventually reflect the
continuing mammoth printing of new US dollars. Traders who
understand this now have a phenomenal buy-low opportunity.